Lennar Builds Up on Earnings Beat

(Lennar earnings report updated with analyst commentary.)

MIAMI ( TheStreet) -- Lennar ( LEN) shares surged on Tuesday after the homebuilder posted better-than-expected fiscal-fourth quarter earnings.
New Homes

The homebuilder booked profits of $32 million, or 17 cents per share, in the three months ended Nov. 3, down from year-earlier earnings of $35.6 million, or 19 cents per share. Year-earlier results include a $320.5 million tax benefit.

Revenue came in at $860.1 million, down 5.9% from $913.7 million in the fourth quarter last year.

Both top- and bottom-line results came in better than expected. Analysts' consensus call had been for earnings of $3.1 million, or 3 cents per share, on revenue of $759.8 million.

Lennar's Rialto segment, which invests in distressed land, added $12.4 million to its operating earnings.

Investors bid Lennar shares 7% higher in late-afternoon trading on Tuesday. The stock closed Monday down 2.6% at $18.90. The stock is up around 8% year-to-date after rebounding 46.8% in 2010.

Deutsche Bank analyst Nishu Sood noted that Lennar's results were "generally favorable," featuring "profit strength that we have seen across the group recently as well as a decent order number."

Sood said that while Lennar's fundamentals had improved, he cautioned that "a high proportion of earnings continues to come from non-operating sources, which we believe should be treated differently than homebuilding earnings." The analyst pointed to the fact that around 48% of Lennars' full-year income came from its Rialto division.

Sood had a hold rating on Lennar shares, setting a $15 price target.

Stifel Nicolaus analyst Michael Widner also maintained a hold rating on Lennar shares, saying the builder's new orders and deliveries were "impressive."

Widner noted that Lennar's "performance looked stronger than expected almost across the board, with the big drivers of the beat being much stronger than projected deliveries and higher gross margins."

Widner said the bottom line is that "Lennar made great strides recapturing lost market share in 2010 with a revised model that doesn't rely on joint ventures. Margins have been strong, cost containment solid, and Rialto has proven a nice earnings contributor. We have been impressed. The key question at the current valuation is whether share gains can continue and margins hold amidst a tough industry backdrop. We are becoming cautious on valuation."

Vicki Bryan, senior high yield analyst at Gimme Credit, noted that "Lennar focused on streamlining operations and improving its balance sheet through the housing market recession, and now it has some of the strongest credit metrics of the group."

The analyst cautioned, however, that Lennar and a number of its homebuilder peers have started ramping up spending on land and joint venture projects before stabilizing its cash flow from operations or materially reducing its leverage.

"We remain concerned that the housing market could remain depressed at unprofitable levels for another year or two, when tax refunds may not be around to replenish cash," she noted. "Lennar's comparatively healthy cash balance plus the emerging success of its new, higher margin Rialto subsidiary is strengthening its competitive advantage."

Standard & Poor's homebuilders analyst Ken Leon maintained a hold rating on Lennar shares following its earnings beat but raised his price target on the stock by $3 to $21, assuming a a wider risk premium and a forward price-to-book of 1.6x.

"With a contract backlog of $407 million, we forecast 10% revenue growth for fiscal 2011, as we see LEN gaining market share from other large builders. Assuming flat to slightly improved gross and operating margins, we maintain our earnings estimates of 60 cents per share for fiscal 2011 and $1.00 for fiscal 2012. Applying a slight premium to peers, we are raising our target price to $21 from $18.

Earlier this month, analysts at Credit Suisse ( CS) downgraded its rating on Lennar to neutral from outperform, lifting its price target by $2 to $19. Analysts at Barclays Capital ( BCS) recently boosted their price target on Lennar by $2 to $23, maintaining an overweight rating on the stock.

Lennar said new-home deliveries were down 12% in its recent quarter to 3,089. Orders for new homes fell 5% to 2,520.

At the end of its fiscal year, Lennar had a backlog of 1,604 homes with a dollar value of $407.3 million, concentrated in the East. At the end of its prior fiscal year, Lennar had a backlog of 1,631 homes, totaling $479.6 million.

CEO Stuart Miller said he was pleased with Lennar's third consecutive profitable quarter "despite the challenging housing market," and attributed success to the company's focus on cost cutting and improved operating margins.

"Although high unemployment, tight lending standards and low consumer confidence continue to present challenges for the housing industry, we are confident that 2011 will be another profitable year," he said. "Our homebuilding segment is on the right track to achieving sustainable profitability, and our Rialto Investments segment will enhance our earnings as the housing market stabilizes and ultimately recovers."

The builder's cancellation rate was 20% in the period, essentially flat year-over-year.

Widner said Lennar's cancellation rate eased some of his industry concerns "but makes us worry a bit more about what happened at KBH."

Homebuilding peer KB Home ( KBH) posted a surprise quarterly profit on Friday.

KB Home said cost cuts led it to post a fourth-quarter profit of $17.4 million, or 23 cents per share, in the period ended Nov. 30. The recent quarter's surprise profit reflected a one-time tax benefit of $2 million. Analysts had been looking for the homebuilder to book a loss of $16.1 million, or 17 cents per share.

Widner noted that KB Home's "dramatic decline in selling, general and administrative expenses and sizable improvement in gross margins drove the beat," adding that "results took KBH from being a relative laggard to the group on SG&A (as a percent of revenue) and about average on gross margins (excluding impairments) to above average on both metrics."

"We were pleasantly surprised, particularly with the improvements coming in a tough quarter for housing," Widner said.

KB Home said revenue in the quarter came to $451 million, down from $674.6 million in the year-earlier quarter as housing and land sale revenues slowed, but higher than the $441.3 million analysts had been looking for.

Fewer homes delivered was partially offset by an increase in the average selling price, the builder said. KB Home's core customers tend to be first-time homebuyers.

KB Home shares were 0.4% higher ahead of the closing bell Tuesday.

Elsewhere in the homebuilder sector, Hovnanian Enterprises ( HOV), which reported a double-digit drop in new-home contracts despite narrowing its losses in its recent quarter, saw its shares add 3.4% Tuesday afternoon.

Hovnanian sold 13% fewer homes in its fiscal fourth quarter, ended Oct. 31. Excluding joint ventures, it sold 1,078 homes, while completed sales fell almost 17% year-over-year to 1,204. The average price of its holds fell 12% to $261,530.

"Hovnanian is the weakest homebuilder of all of its peers, and its financial condition remains under pressure despite two years of debt tenders, exchanges and open market purchases of bonds at steep discounts," noted Vicki Bryan, senior high yield analyst at Gimme Credit.

She maintained an underperform rating on HOV shares.

Building peer Toll Brothers ( TOL) saw its shares upgraded Friday to overweight, from equal weight, by analysts at Barclays Capital ( BCS). The firm set a $23 price target on the stock.

Analysts from Wells Fargo ( WFC) issued upgrades on shares of D.R. Horton ( DHI) and small-cap builder Meritage Homes ( MTH). Both builders now have outperform ratings, up from Wells Fargo's prior ratings of market perform.

Barclays reiterated an equal weight rating on PulteGroup ( PHM), lowering its price target by a dollar to $9.

Toll Brothers shares gained 0.4%, PulteGroup rose 1% and D.R. Horton added 3.4%. Meritage lost 0.4%.

The homebuilder sector is well off its late-spring peak, when buyers were rushing to take advantage of federal tax credits for homebuyers, and is only slightly higher than at the beginning of 2010. Whereas other sectors have begun a rebound in earnest, the housing sector continues to lag.

The SPDR S&P Homebuilders ( XHB), an exchange-traded fund that tracks the homebuilder sector, remains more than 60% off its peak of $46.08 in early 2006. The iShares Dow Jones US Home Construction ( ITB) ETF remains more than 70% off its peak of $50.10 in the spring of 2006.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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